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Seventh Circuit. The Court of Appeals for the Seventh Circuit affirmed in part and reversed in part and remanded the case to this Court in Continental Ill. Corp. v. Commissioner, 998 F.2d 513, issued on July 9, 1993. Following this remand, the parties filed with the Court on November 2, 1994, stipulated computations (the 1994 computations) covering the years 1976 to 1979. The 1994 computations did not include the amounts of the 1979 ITC that were included in the 1992 computations. This Court's decision, based on the 1994 computations, was entered on November 17, 1994, and became final within the meaning of section 7481(a)2 on December 17, 1994 (the 1994 decision). As part of that decision, it was decided that there was an overpayment for the taxable year 1977 in the amount of $9,089,070 and a deficiency for the taxable year 1978 in the amount of $1,544,492.72. The decision document indicated that it “[incorporated] herein the facts recited in the respondent's computation as the findings of the Court”.

Petitioner's tax liability for the taxable years at issue, with the effect and timing of various credit and net operating loss (NOL) carrybacks, reflecting the 1994 decision, is described in more detail as follows.

1977 Tax Year

Petitioner had a tax liability for the 1977 tax year of $24,200,118 before taking into account any credit carrybacks. Between April 15, 1977, and June 17, 1978, petitioner made payments totaling $14,234,576 against this tax liability, producing a deficiency of $9,965,542.

In 1979, there arose a foreign tax credit (FTC) in the amount of $29,327,737 and an ITC in the amount of $17,238,117. In that year, petitioner applied $27,020,189 of the FTC, as well as some of the ITC, to its 1979 tax liability and carried $2,307,548 of the FTC and $7,947,605 of the ITC back to 1977. For interest purposes, petitioner received the benefit of this carryback as of December 31, 1979. Sec. 6601(d).3 Taking into account a refund petitioner received in the amount of $4,067,608 for 1977, petitioner had, as of January 1, 1980, a 1977 tax liability of $3,777,997.

2 That section provides for a 30-day instead of a 90-day period for a decision of this Court to become final where there has been a remand by the Court of Appeals.

3 Sec. 346 of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97–248, 96 Stat. 324, 636, amended sec. 6601(d), effective for interest accruing after Oct. 3, 1982, to

Continued

In 1982, there arose an NOL, $59,552,102 of which was carried back to petitioner's 1979 tax year, pursuant to section 172(b),4 eliminating petitioner's 1979 tax liability. The elimination of the 1979 tax liability had the effect of releasing the FTC and ITC which had arisen in 1979, to be used in other years. Petitioner carried back $27,356,042 of the FTC to 1977, which, along with other credits from 1980 (work incentive credits and new jobs credits) in the amount of $342,819, satisfied its tax liability for 1977. Because of itc limitation rules found in section 46(a)(3) and (4),5 the 1979 ITC originally carried back to 1977 could no longer be used (since there was now, as of 1982, after application of the FTC, no tax liability for 1977 against which it could be applied) and was thus displaced and subsequently carried over to 1981, a year not at issue. As a result of the NOL’s causing the release and carryback of the 1979 FTC to 1977 (and the consequent release of the ITC), there was as of March 15, 1983 (the due date for the 1982 return),6 an overpayment of $9,089,070 for petitioner's 1977 tax year. 7

1978 Tax Year

Petitioner had a tax liability of $6,608,807 for the 1978 tax year,8 not reflecting the effect of any carrybacks from subsequent years. Between April 17, 1978, and October 12, 1979, petitioner made payments totaling $3,633,741 against this liability, leaving a deficiency of $2,975,066.

In 1979, there arose an FTC and an ITC, as discussed above. None of the 1979 FTC was carried back to 1978, and $444,727 of the 1979 ITC was carried back. Thus, as of January 1, 1980, petitioner had a 1978 tax liability of $2,530,339.

change the date on which a taxpayer receives the benefit of a carryback for interest purposes from the last day of the tax year in which the carryback arose to the due date for the return for that year.

4 Sec. 172(b)(1) provides that an NOL for any taxable year shall be carried back to each of the 3 taxable years preceding the loss year. Sec. 172(b)(2) provides that the entire amount of the NOL shall be carried back first to the earliest year possible.

5 For 1977, sec. 46(a)(3) and (4) limits available ITC to $25,000 plus 50 percent of tax remaining after the application of the FTC allowable for that year. The $25,000 limit was taken up with ITC that arose and was used in 1977 and that is otherwise not at issue. Also under sec. 38(c), effective for carrybacks from tax years after Dec. 31, 1983, amounts of FTC must be applied before any amounts of ITC.

6 See supra note 3.
7 The ITC at this point no longer affected petitioner's substantive tax liability for 1977.
8 This liability reflects an ITC that arose in 1978 and was used in 1978.

In 1982, there arose, as discussed above, an NOL which was carried back to 1979, eliminating tax liability for 1979 and releasing the FTC and ITC which had arisen in that year. Of the released 1979 FTC, $1,971,695 was carried back to 1978. Because of the effect of the carryback of this FTC, petitioner was precluded by section 46 from using the ITC carried back from 1979, which was then carried forward to 1981, a year not at issue. When adjusted for additional payments and credits of $79,925, petitioner had a tax liability for 1978, as of March 15, 1983, of $1,464,568.

The deficiencies and interest amounts involved were assessed for both years by respondent and fully paid by petitioner. In early 1995, shortly after the 1994 decision became final, petitioner contacted respondent regarding the issue of the inclusion of the 1979 amounts of ITC. Discussions between petitioner and respondent continued throughout 1995, after which petitioner timely filed a motion under Rule 261 to redetermine the interest flowing from the stipulated 1994 computations with respect to the 1977 and 1978 tax years.

Discussion

For the 1977 tax year, respondent has computed interest on a deficiency of $11,733,7769 from December 31, 1977, to March 14, 1983. For the 1978 tax year, respondent has computed interest on a deficiency of $2,975,066 from December 31, 1977, to March 14, 1983. Respondent has not given effect to amounts of 1979 ITC which were carried back during the period 1980 through 1983 because these amounts of ITC were ultimately displaced and not used for the years at issue.

Petitioner claims that respondent has overcharged it for interest by not taking into account the amounts of the 1979 ITC, with the effect of charging petitioner interest on higher deficiency amounts. Petitioner's position is that respondent must, in plain terms, “give it credit” for the 1979 ITC which reduced its 1977 deficiency to $3,777,997 during the period January 1, 1980, to March 14, 1983, and reduced its 1978 deficiency to $2,530,339 during the same period, and charge it interest on those lesser deficiency amounts during that period. Petitioner's claim is based on the notion that respondent had use of the money represented by the 1979 ITC “payment” during the “interim” period from January 1, 1980, to March 14, 1983, and cannot now charge petitioner for the use of that money.

9 There is an unexplained difference of $8,174 in this figure. It is elsewhere listed as $11,725,602. We use the figure from the stipulated 1994 computations.

Petitioner alleges that the amounts of ITC, which were included in the Rule 155 computations that were prepared in 1992 before a decision was rendered by the Court of Appeals for the Seventh Circuit, were erroneously left out of the 1994 computations.10 Due to the effects of the subsequent carryback of the NOL from 1982, the inclusion or exclusion of the amounts of 1979 ITC does not alter the underlying net tax liability for either taxable year. Petitioner does not contest in any way its tax liability for the deficiencies as reflected in the 1994 decision.

Section 7481(c) provides:

SEC. 7481(c). JURISDICTION OVER INTEREST DETERMINATIONS.- Notwithstanding subsection (a), if –

(1) an assessment has been made by the Secretary under section 6215 which includes interest as imposed by this title,

(2) the taxpayer has paid the entire amount of the deficiency plus interest claimed by the Secretary, and

(3) within 1 year after the date the decision of the Tax Court becomes final under subsection (a), the taxpayer files a petition in the Tax Court for a determination that the amount of interest claimed by the Secretary

exceeds the amount of interest imposed by this title, then the Tax Court may reopen the case solely to determine whether the taxpayer has made an overpayment of such interest and the amount of any such overpayment. * *

See also Rule 261, which implements sec. 7481(c); Note to Rule 261, 93 T.C. 1040–1041; Stauffacher v. Commissioner, 97 T.C. 453, 455–456 (1991). There is no dispute that, as to both tax years, the three requirements of section 7481(c) have been met.

First, the entire amount of the deficiency plus interest has been paid. Sec. 7481(c)(2); Melin v. Commissioner, 54 F.3d 432 (7th Cir. 1995).

Second, a timely petition was filed. Sec. 7481(c)(3).

10 See appendix, and discussion infra p. 18.

Third, a deficiency which includes interest has been assessed in respect of each year. Sec. 7481(c)(1); Asciutto v. Commissioner, T.C. Memo. 1992-564, affd. 26 F.3d 108 (9th Cir. 1994). In this connection, even though an overpayment was ultimately found for 1977, there was a deficiency for the period during which interest accrued, which is the subject of this dispute. In addition, where we have jurisdiction to determine an overpayment (as we did in the original deficiency proceeding in this case), we also have jurisdiction over the interest on that overpayment. Estate of Baumgardner v. Commissioner, 85 T.C. 445 (1985). Under these circumstances, the interest issue before us in respect of 1977 is within our jurisdiction. 11

There is also some question as to the exact nature of the relief petitioner is requesting for 1978. The statute only grants this Court jurisdiction to determine an overpayment of interest on a deficiency. Petitioner alleges that respondent has, on the whole, underassessed interest on the 1978 deficiency. However, petitioner also contends that, as part of the interest calculation which resulted in an underassessment with respect to the 1978 tax year, respondent has overcharged interest on the 1978 deficiency during the period between its initial use of the carryback of the 1979 ITC and the occurrence of the superseding 1982 NOL. Under these circumstances, we are satisfied that we have jurisdiction to determine whether there has been an overpayment of interest during the specific "interim” period. 12

The three requirements of section 7481(c) having been satisfied, we turn our attention to the basic question involved herein, i.e., the extent to which the itc for 1979, which was omitted from the 1994 computation, should be taken into account as a payment for the purpose of determining interest due. The parties have locked horns on four elements upon which the resolution of this question depends:

(1) Respondent contends that the 1994 decision, has become final and that petitioner's motion seeks to modify that decision contrary to the established principle that this Court does not have jurisdiction to take such action in the

11 We note that respondent does not contest our jurisdiction as to 1977.

12 In reaching this conclusion, we note respondent's indication on brief that respondent will make any computational adjustments that are a consequence of our decision, whether they result in interest due to petitioner or respondent.

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